As business closures become more widespread to implement social distancing measures, many now find themselves making tough decisions around the continuation of employment of workers and the concomitant risks of corporate insolvency.
In addition to the stimulus measures aimed at keeping workers in jobs, on Sunday the Federal Government announced an additional measure to attempt to shield companies from creditors and stave off corporate insolvencies.
Statutory demand process
The statutory demand process is an important tool used by creditors to recover debts owned by companies.
Where a company fails to either take court action to have the demand set aside or pay the debt before the expiry of the statutory demand period they are deemed to be insolvent. Once deemed insolvent, the creditor can take steps to have the company wound up.
Under the interim measures:
- The minimum debt amount that may form the basis for a statutory demand under the Corporations Act 2001 has been increased from $2,000 to $20,000; and
- Companies will now have 6 months to respond to a statutory demand (formerly 21 days).
The changes will provide a significant shield (effectively rendering the statutory demand regime toothless) while they are in place.
The insolvent trading regime imposes personal liability for any new debts incurred by companies on directors who permit those companies to keep on trading following their insolvency (ie, typically considered to be the point at which they are unable to pay their debts as and when they fall due).
This can often impose significant barriers to companies whose directors may genuinely believe that they can resurrect a company’s fortunes but need to protect themselves from personal liability.
The operation of these provisions has been deferred by 6 months, providing some breathing space for directors as they seek to re-organise the company’s affairs and seek any government of financial assistance that may be available.
Note that directors whose conduct is considered “egregious” may still be liable under the amended regime.
While the measures will have obvious benefits to keep companies in existence, they will obviously have downstream impacts on the creditors of those companies.
While these measures will assist, it is still important to:
- seek to maintain important long-term relationships with landlords, financiers, suppliers and other key creditors (where possible) by communicating the extent of the company’s distress and seeking where possible to reduce debt or defer obligations;
- investigate all measures that have been put in place to support business activity.
We can’t emphasise this enough – keep communicating and don’t stick your head in the sand.
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